Macro Tsimmis

intelligently hedged investment

Archive for August, 2007

BUY UltraShort Real Estate ETF (SRS)

Posted by intelledgement on Fri, 31 Aug 07

As we mentioned a couple of weeks back when we unloaded the Australian index ETF (EWA), we would be watching for a chance to take a position in ProShares’real estate short fund (SRS) under $100. Well patience has paid off, as with Fed Chairman Ben Bernanke’s pronouncement today that the Fed “will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets” has The Street celebrating in anticipation of a Fed funds rate cut next month. Consequently, this ETF (which rises when real estate companies decline and vice versa) is down sharply today to about a midway point between the 52-week high and low. Accordingly, we are putting the proceeds of the sale of our Australian ETF back to work here.

We don’t know if there will be a cut in the Fed funds rate or just another cut in the discount rate, but neither action is going to cure the excesses of the real estate market over the past several years. We are in this mess in part because of easy credit enabling loans to be made that should not have been for houses with unrealistically inflated values. Making mortgages a little easier to get ain’t gonna solve the bad paper problem, and it may actually make it worse. It sure wouldn’t help the dollar any.

The big picture here is that collectively, the USA has been borrowing cheap money like mad and mostly spending it on operations (vacations, jacuzzis, invasions) instead of capital investments (infrastructure, education, production capacity). This unsustainable dynamic has to end sooner or later, and the industries that depend on overpriced real estate for succor will be among the first to lose their balance and are likely to fall the furthest.

The managers of the UltraShort REAL ESTATE fund utilize leverage techniques—futures contracts, options on futures contracts, securities and indices, forward contracts, swap agreements and similar instruments—to attempt to attain daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Real Estate Index.

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Buy Golden Star Resources (GSS)—yep, again!

Posted by intelledgement on Fri, 24 Aug 07

OK, we freely admit we have no idea why The Street is so heavily discounting the value of this company and their properties at this point…the stock dropped from $3.69 on 10 August to $2.92 (with an intraday low of $2.65) on 16 August…but these prices, if not insane, are at least irresistable.

If you look at profitable gold mining companies, their reserves on average are valued at around $210/oz in terms of marketcap/ounces. At the $2.96/shr GSS closed at yesterday, they have a marketcap of  $694MM, which means their 4.15MM ounces of reserves are being valued at $167. That is cheap, but consider the likelihood that GSS reserves are at least 20% higher than the number they reported last 31 December and the disparity is even greater: $139/oz. The stock would have to go to at least $4.50 just to have an average valuation…and if the costs come down and the production goes up as expected over the next 18-to-24 months, GSS shares should probably be trading at a premium valuation.

In any event, they are too cheap to ignore here and so we are acquiring another tranche.

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Neurocrine Biosciences (NBIX) update #2

Posted by intelledgement on Tue, 21 Aug 07

Neurocrine Biosciences, Inc. (Nasdaq: NBIX) announced today that the FDA have accepted the company’s resubmission of its NDA for 5 mg and 10 mg capsules of the prospective insomnia drug indiplon and that the FDA has set a PDUFA action date of 12 December 2007.

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SELL MSCI Australia Index (EWA)

Posted by intelledgement on Wed, 15 Aug 07

One thing is for sure: with each passing day, we are that much closer to selling everything and going short.

Which is not to say that it is imminent; we still think the most likely scenario is that the powers that be will contrive to keep the shell game going on for at least another year. The Chinese and others have massive stockpiles of US dollars and before they would see the Fed cut rates here, I think we will see an effort on the part of those dollar holders to repatriate them by chasing US equities and possibly real estate. A rate cut on top of the recent liquidity injections would accelerate the crash of the dollar, which would be considerably inconvenient for China for a couple of reasons. The first of these is the inhibiting effect inflation would have on the already-diminishing power of the US consumer to fuel Chinese economic expansion. The Chinese middle class is not yet ready to accept the baton, and in the interest of avoiding internal disruptions, the Chinese government is likely to prefer to buy them more time, particularly when all they have to spend are zombie dollars that will sooner or later be worth nothing anyway. The second incentive the Chinese have to heading off a Fed rate cut is the obvious one: it will speed up the devaluation of their massive holdings of dollars.

Nevertheless, while we continue to believe the odds favor those who would hold back the tide of financial ruin for the over-extended and deficit-ridden USA and our overvalued assets and markets, their success is not pre-ordained. The recent forced march injections of liquidity into the system by central banks around the globe is not a bullish sign. While it underlines that governments will do what they can to avoid market Armageddon, the fact that the powers-that-be are pushing those buttons here indicate that this is perceived as more than a normal, healthy, 10% correction. (The markets are not even down 10% off their highs yet.)

Accordingly, we are taking some money off the table here, in selling the EWA ETF, which is up on the year for us, but lagging most of our other ETF long positions. We are not immediately redeploying these funds, but if we get a chance to pick up some of the UltraShort Real Estate ProShares ETF (SRS) below $100, that would be awful tempting.

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Transmeridian (TMY) update #8

Posted by intelledgement on Fri, 10 Aug 07

The beat(ing) goes on…Transmeridian (TMY) management must be so depressed by their present situation—production from their South Alibek field, spotty at the best of times, indefinitely shut down by the Kazakhstani government over a gas flaring issue—that they did not bother to issue a press release announcing their 2Q07 results, nor hold a conference call for analysts and investors. They did post the information on the SEC’s EDGAR system yesterday (as required for a public company), and the numbers were not cheering. Production, while up y-o-y from 2Q06’s 1450 bpd to 2450 bpd in 2Q07 marked a steep decline from 1Q07 (3500 bpd). and so the company fell far short of the minimum target of 4000 bpd needed to break even on pumping operations, to say nothing of the 6500-to-8000 bpd needed to fund the debt service and continued drilling operations.

The one piece of good news is that revenue was up sharply in 2Q07 due to a record $51.27 average price per barrel; the company benefited both from higher world market prices and from delivering oil via pipeline and thus ducking the cost of truck/train transport which previously was deducted from the price of each barrel. Alas, the production curtailment which was announced 29 June has extended far beyond the company’s original estimate of two weeks. Management believe they have reached an agreement in principle but the process for getting the agreement approved by the right Kazakhstani government officials remains murky and in the meantime, there is no production.

As speculated here previously, could be the government intends to grease the skids here for Transmeridian. At this point, we believe that management will be forced to sell out to a better-capitalized buyer who can afford to invest in the infrastructure needed to obtain economic levels of output from the South Alibek field. We continue to believe that oil is present there, and expect that a buyer will pay more than the depressed $1.84/share the stock is going for now. So we are stubbornly holding on here.

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Jul 07 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Thu, 09 Aug 07

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 1.80 540.00 2.27% -45.89% -65.81%
PTR 23-Jan-07 8 127.17 1,025.36 144.46 1,171.69 -2.84%   14.27% 29.41%
IFN 13-Feb-07 24 41.76 1,010.24 45.75 1098.00 4.81% 8.69% 19.85%
FXI 27-Feb-07 10 95.00 958.00 139.91 1,399.10 8.58% 46.04% 145.54%
FDG 20-Mar-07 44 22.68 1,005.92 33.11 1,508.23 1.13% 49.94% 204.14%
ELN 04-Apr-07 129 13.90 1,801.10 18.73 2,416.17 -14.59% 34.15% 148.28%
VRTX 18-Apr-07 57 31.65 1,812.05 32.30 1,841.10   13.10% 1.60% 5.74%
NBIX 22-May-07 158 11.33 1,798.14 10.17 1,606.86 -9.44% -10.64% -44.39%
BQI 13-Jul-07 565 3.35 1,900.75 4.40 2,486.00 n/a 30.79% 23,101.92%
GSS 19-Jul-07 451 4.19 1,897.69 3.72 1,677.72 n/a -11.59% -97.65%
cash       -4,207.25   3,464.45      
Overall 03-Jan-07     10,000.00   19,209.32 0.90% 92.09% 212.94%
Global HF 03-Jan-07     10,000.00   10,811.83 0.40% 8.12% 21.24%
NASDAQ 03-Jan-07     2,415.29   2,546.27 -2.19% 5.42% 13.92%

Position = security the portfolio owns
Purchased = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share
Cost = what portfolio paid (including commission)
Now = price per share
Value = what it is worth as of the date of the statement (# shrs multiplied by price per share plus value of dividends)
Change = Change since last report (blank for positions new since last report)
Return on Investment = on a percentage basis, the performance of this security to date
Compounded Annual Growth Rate = annualized ROI for this position (to help compare apples to apples)

Notes: The benchmark for this portfolio is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2006 inclusively) provides a CAGR of around 15.4%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 11.0%. Note that for the portfolio, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 3% rate of interest on the listed cash balance.

Transactions: Added two resource plays this month, one gold prospector and one black gold prospector.


  • TMY, 1 Jul—Ouch! Dispute over gas flaring forces Transmeridian to shut down production for two weeks so they can get permission to flare until they can fix the problem
  • DNDN, 15 Jul—ok, we don’t own this anymore, but we still rooting for the guys with prostate cancer to get their Provenge
  • TMY, 16 Jul—dispute with Kazakhstani government over gas flaring resolved but agreement needs to be approved; all production remains shut down for up to another two weeks
  • ELN, 19 Jul—bad news from Europe for Élan
  • VRTX, 25 Jul—good preliminary results from phase 2 testing on telaprevir
  • TMY, 29 Jul—ok, now the story is the agreement has not been approved and the shutdown might last until November (earliest TMY can fix the problem)
  • ELN, 31 Jul—good news from USA for Élan

Comments: Another modest month, with a 1% gain—enough to beat the hedgies (+0.4%) and the NASDAQ (-2%). While on the surface, the port appears to have had a quiet month, some of the components made a lot of noise, principally BQI which was up 31% in the two-and-a-half weeks since we bought in on the strength of strong reserve numbers, and our biotechs, which had their typical adventures and misadventures (VRTX +13%, NBIX -9%, ELN -15%). Plus FXI was up 9% for the month and our new gold miner is already down 12% in twelve days. LOL just another quiet month at the spec port. Overall we must be doing something right as we are +92% so far in 2007 compared to +8% for both the Greenwich Alternative Investment’s hedge fund index and +5% for the NASDAQ.

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Golden Star Resources (GSS) update

Posted by intelledgement on Wed, 08 Aug 07

Golden Star Resources (GSS) released their 2Q07 results yesterday, and they included something for everyone. Production numbers were weak—as expected given the BIOX® plant delays—and costs were high—as expected given the power supply issues—but neither were as bad as some had feared and management sees improvement through the rest of the year and into 2008.

And speaking of management and improvement, two days ago the company announced that long-time CEO Peter Bradford has resigned both from the company and board of directors effective at the end of 2007. While there has been improvement of late, Bradford presided over several years of missed estimates and poor investor relations and his departure could speed up the process of improved credibilty for GSS management.

But back to the second quarter. The company produced 42,295 ounces of gold at an average cost of $572/ounce which they sold for $665/ounce, a profit margin too narrow to avoid a loss of $2.3MM. Although production actually declined from 1Q07 (45,825 ounces), GSS have confirmed their projections of 270M-to-300M ounces of total production for the year, based on the BIOX® plant now finally being operational. And that is not the end of the potential good news: in addition to the 100 megawatt coop power station now expected to come online in August—GSS’s allotment of the output of this four-company project is 20 megawatts—the company has concluded a deal with an independent power producer to provide 10-to-20 additional megawatts. And proving that it never rains but it pours, early indications are that the drought may be lifting as so far this year, precipitation in Ghana has been near normal…although the government has not yet lifted power rationing. But taken together, these factors enable management to project full-year per ounce production costs of $480 or less, which at the production rates they envisage, will virtually assure black ink for 2007.

But wait, there’s more. The company continues to move forward on the $50MM development project for their Hwini-Butre and Benso (HBB) properties. Work is expected to commence this quarter, once permitting is completed. Construction of a 52-kilometer haul road between Benso and Wassa will commence late this quarter with completion estimated by mid-2008. Pre-stripping and ore mining at Benso is expected to commence 2Q08 with the first ore hauled to Wassa for processing in 3Q08. Mining at Hwini-Butre is expected to commence mid-2009 once a 30-kilometer haul road extension is completed. This project is expected to materially increase production in 2008 and 2009. We can also anticipate a significant increase in the company’s 4.1MM ounces of gold reserves when the numbers are updated early next year.

And finally, management project that with cash on hand and with positive cash being generated over the last six months of the year from both operating mines, there is no need for additional financing to cover everything currently on the drawing board (including active exploration in Ghana, Niger, Sierra Leone, and Suriname).

So the price of the stock, which had dipped as low as $3.20 yesterday in anticipation of really bad results continues to look very attractive here around $3.50 (about seventy cents cheaper than we bought it last month).

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